Dan Adler is president of the California Clean Energy Fund (CalCEF), a $30 million non-profit venture capital fund created to accelerate investment in the state’s clean energy economy.
CalCEF was formed after the California electricity crisis of 1999-2000 as part of the bankruptcy settlement negotiated by the California Public Utilities Commission (CPUC) and Pacific Gas and Electric Company (PG&E).
Q: Describe the rationale behind the formation of a non-profit venture fund.
A: The founding thesis of CalCEF was that there was insufficient attention from the private sector around clean energy technology which would be necessary to help California hit its clean energy targets.
The core part of our non-profit mission is evergreen so any returns go straight back into the mission we don’t distribute profits to anyone.
The $30 million came from shareholders, not ratepayers. It was dedicated to provide initial capital and motivate the private sector to make smart investments in transformative clean tech that would turn into world-beating companies that would partner with the public policy drivers that are reshaping the energy business.
We certainly didn’t expect in 2004 that there would be this tremendous increase in interest in the venture capital community in clean technology. That was exactly the kind of result we were trying to help stimulate and to some degree I think we’ve had played a role in that.
Q: What would be done differently if CalCEF were formed today?
A: When we started out we said not only are these technologies compelling but if you understand policy and work with the public sector you’re going to make more money because that’s the way this industry works – through policy-related market activity. The venture industry liked that thesis initially and we partnered with three established firms Nth Power, Element Power and Vantage Point.
They all went on to raise more money than they anticipated as they found the receptivity on the part of their partners to be greater than expected. So the fund became larger and then history tells the story of what happened to VC clean tech over the last 5 years – it became very, very bullish. But people lost sight of the importance of regulation in public policy in industry.
So if we were to start today, what we would be less of a silent partner in a lot of these investment transactions. But what we would stick with is this thesis that policy matters more in this industry than any other technology category and if you don’t pay attention to it, then you’re going to get burned.
Q: What are advantages or disadvantages of being nonprofit?
A: By structuring ourselves as a nonprofit we signal to the marketplace that we’re not just trying to get rich. In fact we’re not getting rich period. We’re happy that others might be. And others need to if this is going to be a meaningful undertaking. But as trusted intermediaries and interlocutors across the field of policy, technology and finance we have been able to maintain a higher level of credibility than any purely private actor would have been able to.
Q: What are the major barriers to VC investment in clean energy?
A: In the past, there was some shock associated when VCs realized that they needed to raise hundreds of millions of dollars to get any kind of meaningful market size. The nature of regulatory oversight and the ways in which energy is regulated as a commodity really is a tough burden for the entrepreneurial mindset for the VC community – they don’t like to talk to government.
Incentives in the energy industry can be fickle in the US. We’ve had cyclical allocation of public resources to support clean energy that has waxed and waned over the last decade that’s very hard to build a business around. The energy industry doesn’t really look like anything else within the free market because of this societal overlay.
Q: How important are ESG (Environmental, Social and Governance) metrics in your investment decisions?
A: We are definitely of that ilk. But our emphasis is on clean energy – we’re not even clean tech. We’re trying to marry public policy with finance. But our emphasis is on meaningful energy innovation that has market returns. We can’t be out there with a $30 million fund taking losses or marginal returns and end up having zero impact.
Energy is the biggest business in the world, and we know that we have to change it for multiple reasons, not least because of climate change. But it’s no longer just the purview of the environmentalists – the age of the environmental advocate has been met by the sophistication of the technology entrepreneur and we’re starting to see more money flow into that sector.
Q: Could you give me an example of success?
A: We just had our first exit – from the Tesla IPO. We were an investor in VantagePoint who invested in Tesla, which went public a year ago. We now have a new source of capital for our evergreen financial model.
I can’t give you the dollar value, but I would say that we had a five times multiple on our investment. And that was relatively fast.
Q: Do emerging clean tech innovations and investor trends always correspond?
A: They rarely do. You have the leaders in the venture field and then you’ve got the followers in the venture market who are in copycat mode and try to make money on the jet stream, on the tail.
To a large extent that was happening in the really outsized commitments to solar in the past several years. But we’ve since seen a really dramatic drop in the cost curve of solar because of venture interest, China’s role in driving down PV [photovoltaic] costs and states like California getting technologies to cost competitiveness.
Q: Smart grid companies have found it relatively easy to attract investment. Is that because software is something that investors understand?
A: To see something like a digital meter or a wireless transceiver is refreshingly familiar to them and the business case is very strong, utilities like it so not only is it good on the energy savings side, it’s a good fit for what venture investors know.
Q: Does that explain the relatively low interest in energy efficiency investments until recently?
A: It started out as a failure of the imagination on the part of the tech investor and the phrase that we always used to hear was energy efficiency is not sexy. Dick Cheney once said something like “efficiency is not an American virtue”. It was a really parochial and overly macho view of what “real” men do with their money.
And then the tech caught up – people said this is interesting but what does the business actually look like? You have to deal with the utilities a lot, particularly if you want incentives. So you need to get utilities more innovative in helping industrial partners to get capital and engage with efficiency.
And no one has figured out how to bring industrial efficiency to meaningful scale. A project finance solution for large scale projects would be a very nice innovation in the venture model.
Q: Is it too soon to anoint the winners in clean energy?
A: We’re maybe one level down away now from that degree of consolidation. I would say we just need to identify losers a bit better and narrow the field that way – no unmitigated coal, or tar sands or unregulated fracking of natural gas. We certainly are no way near the scale where I would say we’ve got enough internal momentum as a clean energy industry broadly: we face a major problem with natural gas in this country and we don’t know how to store renewables with any cost-effectiveness; there’s a lot of range anxiety on electric cars, we can’t make biofuels that don’t compete with food at scale and we can’t figure out a way to finance efficiency. Other than that I think we’ve got it nailed.
Picture: Los Angeles on a sunny day.